July 25 (Bloomberg) -- Orange SA fell the most in more than
a year after France’s former phone monopoly disclosed a tax
expense topping 2 billion euros ($2.6 billion), prompting
predictions of a credit-rating cut and overshadowing cost-cutting efforts to sustain profits.

The company previously known as France Telecom said today
it plans to appeal a decision requiring it to pay 1.95 billion
euros in July and 190 million euros in September to the French
tax authorities for issues related to simplifying the group’s
structure in 2005. The stock dropped as much as 5.6 percent, the
biggest intraday decline since June 2012.

“While the cash impact is immaterial, the accounting
treatment changes results, which will likely have a negative
impact in credit rating agencies’ views,” Goldman Sachs Group
Inc. analysts Andrew Lee and Joshua Mills said in a note.

France’s largest phone operator, which has expanded into
the Middle East and Africa, is navigating falling phone bills in
Europe and political turmoil in countries such as Egypt. Chief
Executive Officer Stephane Richard is cutting costs and shying
away from acquisitions to reduce debt, in efforts to revive a
stock that’s falling for a sixth year.

The stock fell 4.8 percent to 7.38 euros at 1:08 p.m. in
Paris, taking its decline to 12 percent this year.

Earnings Fall

Orange said it has kept a high level of liquidity to meet
the tax payments, which will have “no impact on the operating
performance.”

The Paris-based company today posted an 8.5 percent drop in
second-quarter earnings before interest, taxes, depreciation and
amortization, to 3.29 billion euros, in line with analysts’
estimates. Sales fell to 10.3 billion euros.

Standard & Poor’s in April cut Orange’s rating by one step
to the third-lowest investment grade, while Fitch Ratings
lowered its rating in October. Both have a stable outlook.
Moody’s Investors Service has a negative outlook on its A3
credit rating for Orange, the fourth-lowest investment grade.

“Two agencies today rate us with a stable outlook and one
has a negative outlook” and “I expect this tax event is the
occasion for this agency to downgrade,” Chief Financial Officer
Gervais Pellissier said on a conference call. “Still, I don’t
expect that we would be out of the scope of the best-rated
operators in Europe.”

Orange today confirmed it plans to reduce its ratio of net
debt to Ebitda to close to 2 times by the end of 2014, from 2.2
times at the end of this year. The company also reiterated it
will pay a dividend of at least 80 cents a share for 2013,
including an interim portion of 30 cents to be paid in December.

Cost Cuts

Orange repeated its forecast for an operating cash flow of
more than 7 billion euros this year, compared with 8 billion
euros in 2012. The company is betting on cost cuts to help reach
this target despite increased competition, including in France
where Iliad SA started selling discounted mobile packages in
January last year.

CEO Richard, confirmed in his role last month after facing
a fraud charge linked to a previous job at the French finance
ministry, forecast the company will exceed its initial target of
600 million euros of savings this year.

“Our earnings show we’re totally dedicated to cutting our
costs,” Richard said on a call. “We’ve started reducing staff
by using demographics to our advantage, and this effort will
continue paying off in the coming months and years.”

Selling part of EE, Orange’s joint-venture with Deutsche
Telekom AG in the U.K., could bring in extra cash. The parent
companies have hired banks to start work on an initial public
offering of part of EE, Pellissier said. The operation will
probably be presented to the market in 2014, he said. A sale to
private equity firms isn’t the preferred option at this point,
the CFO said.

International Expansion

Orange, which makes more than half of its earnings at home,
has sought growth in markets such as the Middle East and Africa.
In the past three years it entered Morocco, Iraq and the
Democratic Republic of Congo. Its fastest-growing region last
year was the Middle East and Africa and Orange forecasts revenue
from the region will rise to 7 billion euros by 2015.

Still, the company has faced some obstacles. A year after
Orange struck a $2 billion deal to raise its stake in its
Mobinil venture in Egypt, the company in February reported a 400
million-euro impairment cost on increased risk there.

This week Egypt’s army chief urged the public to take to
the streets and give the military, which toppled President
Mohamed Mursi three weeks ago, a mandate to stamp out the
violence which has roiled the country since then.